DBRS Morningstar Assigns Provisional Ratings to Silver Hill Trust 2019-SBC1

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of secured floating-rate notes to be issued by Silver Hill Trust 2019-SBC1 (the Issuer):

-- Class A1 at AAA (sf)
-- Class A1-IO at AAA (sf)
-- Class A2 at AAA (sf)
-- Class A2-IO at AAA (sf)
-- Class M1 at AA (sf)
-- Class M1-IO at AA (sf)
-- Class M2 at A (sf)
-- Class M2-IO at A (sf)
-- Class M3 at BBB (sf)
-- Class M3-IO at BBB (sf)
-- Class B1 at BB (sf)
-- Class B1-IO at BB (sf)
-- Class B2 at B (sf)
-- Class B2-IO at B (sf)

All trends are Stable.

The collateral consists of 1,003 individual loans secured by 1,003 commercial, multifamily and single-family rental (SFR) properties with an average loan balance of $450,008. DBRS Morningstar defines properties as buildings located in non-contiguous addresses. The transaction is configured with a sequential pay pass-through structure. Given the complexity of the structure and granularity of the pool, DBRS Morningstar applied its “North American CMBS Multi-borrower Rating Methodology” (the CMBS Methodology) and its “RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology” (the RMBS Methodology).

Of the 1,003 individual loans, 205 loans, representing 18.0% of the pool, have a fixed interest rate with a straight average of 7.6%. The floating-rate loans are structured with interest-rate life floors ranging from 6.0% to 11.0% with a straight average of 7.7% and interest-rate margin ranging from 0.75% to 6.0% with a straight average of 2.9%. To determine the probability of default (POD) and loss given default inputs in the CMBS Insight Model for floating-rate loans, DBRS Morningstar applied a stress to the various indexes that corresponded with the remaining fully extended term of the loans and added the respective contractual loan spread to determine a stressed interest rate over the loan term. DBRS Morningstar looked to the greater of the interest-rate floor or the DBRS Morningstar stressed index rate when calculating stressed debt service. The average DBRS Morningstar modeled coupon rate across all loans was 7.7%. The loans have original terms of ten years to 30 years and amortize over periods of 15 years to 30 years. When the cut-off loan balances were measured against the DBRS Morningstar stressed net cash flow (NCF) and their respective actual constants or stressed interest rates, there were 878 loans, representing 87.8% of the pool, with term debt service coverage ratios (DSCRs) below 1.15 times (x), a threshold indicative of a higher likelihood of term default.

The pool has an weighted-average (WA) original term length of 347 months or 28.9 years with a WA remaining term of 335 months or 27.9 years. Based on the original loan balance and the appraisal at origination, the pool had a WA loan-to-value (LTV) ratio of 65.2%. DBRS Morningstar applied a pool WA LTV of 71.5%, which reflects adjustments made to values based on implied cap rates by market rank. Furthermore, all but 33 of 1,003 loans fully amortize over their respective remaining loan terms, resulting in 97.5% expected amortization; this is not representative of typical commercial mortgage-backed security (CBMS) conduit pools, which have substantial concentrations of interest-only (IO) and balloon loans. DBRS Morningstar research indicates that, for CMBS conduit transactions securitized between 2000 and 2018, average amortization by year has ranged between 7.5% and 22.0% with an overall median of 12.5%.

Of the 1,003 loans, 45 loans, representing 1.6% of the trust balance, are secured by SFR properties, defined as one to four investor properties with one unit by the Issuer. The CMBS Methodology does not currently contemplate ratings on SFR properties. To address this, DBRS Morningstar severely increased the expected loss on these loans by approximately 2.5x over the average non-SFR expected loss.

The fully adjusted default assumption and model generated severity figures from the DBRS Morningstar CMBS Insight Model were then applied to the RMBS Cash Flow Model, which is adept at modeling sequential and pro-rata structures on loan pools in excess of 1,000 loans. As part of the RMBS Cash Flow Model, DBRS Morningstar incorporated four conditional prepayment rate stresses – 5.0%, 10.0%, 15.0% and 20.0%. Additional assumptions in the RMBS Cash Flow Model include a 22-month recovery lag period, 100% servicer advancing and four default curves (uniform, front, middle and back). The shape and duration of the default curves were based on the residential mortgage-backed security loss curves. Lastly, rates were stressed, both upward and downward, based on their respective loan indices.

The pool is relatively diverse based on loan size with an average balance of $450,008, a concentration profile equivalent to that of a pool with 617 equal-sized loans and a top-ten loan concentration of only 4.7%. Increased pool diversity helps to insulate the higher-rated classes from event risk. Furthermore, the loans are mostly secured by traditional property types (i.e., retail, multifamily, office and industrial) with no exposure to higher-volatility property types, such as hotels, and minimal exposure to self-storage or manufactured housing communities, which represent 4.3% of the pool balance combined. Lastly, all but 33 loans in the pool fully amortize over their respective loan terms between 120 months and 360 months, thus virtually eliminating refinance risk.

The pool has high term risk as supported by the low WA DBRS Morningstar DSCR of 0.89x. The DBRS Morningstar DSCR reflects a conservatively stressed NCFs. Furthermore, the pool has a cut-off WA LTV of 65.2% based on appraisal values at loan origination that suggests overall moderate leverage.

The pool is heavily concentrated with multifamily, representing 35.8% of the pool, as modeled by DBRS Morningstar. Multifamily properties included assets identified by the Issuer as multifamily, bulk residential contiguous, bulk residential non-contiguous, mixed-use assets that were predominately residential, and one to four investor properties with two or more units. Based on DBRS Morningstar research, multifamily properties securitized in conduit transactions have had lower default rates than most other property types. Of the pool balance, 30.0% of the multifamily loans are located in strong suburban or urban markets, identified by market ranks of five or greater, which typically have a more robust tenant demand for multifamily properties.

Of the 548 loans on which DBRS Morningstar performed exterior inspections, 34 loans, representing 4.4% of the pool (41.8% of the DBRS Morningstar sample), were modeled with Average (-) to Poor property quality and, on an overall basis, the mean DBRS Morningstar property quality was Average (-). Lower-quality properties are less likely to retain existing tenants, resulting in less stable performance. DBRS Morningstar increased the POD for these loans to account for the elevated risk. Furthermore, DBRS Morningstar modeled any uninspected loans as Average (-), which has a slightly increased POD level.

Limited property-level information was available for DBRS Morningstar to review. Asset Summary Reports, Property Condition Reports (PCRs), Phase I/II Environmental reports and historical financial cash flows were not provided in conjunction with this securitization. DBRS Morningstar received a long- or short-form appraisal for loans in its sample, which DBRS Morningstar used in the NCF analysis process. No environmental reports were provided; however, only 11.1% of the pool consists of loans secured by industrial properties, which would typically have an increased risk of environmental concerns originating at the property. Furthermore, as of the Cut-off Date, approximately 0.7% of the pool will be covered by an individual environmental insurance policy and approximately 33.9% of the Mortgage Loans will be covered by one or more blanket environmental insurance policies. No PCRs were provided; however, DBRS Morningstar used capital expense estimates in excess of its guideline amounts and its assessment of the sampled property quality to stress the NCF analysis. DBRS Morningstar’s NCF analysis resulted in a 27.8% reduction to the Issuer’s NCF, well above the median historical reduction of 8.0% across CBMS conduit transactions, which provides meaningful stress to the default levels.

DBRS Morningstar was provided limited borrower information, net worth or liquidity information and credit history. DBRS Morningstar modeled loans with Weak borrower strength, which increases the stress on the default rate. Furthermore, DBRS Morningstar was provided a 24-month pay history on each loan. Any loan with more than two late pays within this period (or one late pay for loans with less than 24 months of history) or two consecutive late pays was modeled with additional stress to the default rate. This assumption was applied to 17 loans, representing 2.2% of the pool balance. Additionally, loans originated under the Lite Doc or Bank Statement documentation programs were modeled with additional stress to account for risk associated with borrowers that are potentially less sophisticated or have negative credit histories. Finally, a borrower FICO score as of October 2019 was provided on 739 of the 1,003 loans with an average FICO score of 722. While the CMBS Methodology does not contemplate FICO scores, the RMBS Methodology does and would characterize a FICO score of 721 as near-prime, where prime is considered greater than 750. A borrower with a FICO score of 721 could generally be described as potentially having had previous credit events (foreclosure, bankruptcy, etc.), but it is likely that these credit events were cleared about two to five years ago.

Classes A1-IO, A2-IO, M1-IO, M2-IO, M3-IO, B1-IO, B2-IO are IO certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche in the waterfall.

All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS Morningstar.

Notes:
All figures are in U.S. dollars unless otherwise noted.

With regard to due diligence services, DBRS Morningstar was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is North American CMBS Multi-borrower Rating Methodology, which can be found on www.dbrs.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on www.dbrs.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

For more information on this credit or on this industry, visit www.dbrs.com or contact us at [email protected].

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